Barrick Gold reins in costs; could suspend Chile project

Julie Gordon, Euan Rocha

6 Min Read

TORONTO (Reuters) - Barrick Gold Corp (ABX.TO), making a painful adjustment to a sustained slump in bullion prices, reported progress in controlling costs on Wednesday and said it is further reducing capital spending, sending its shares higher.

The world’s No. 1 gold producer also said it may suspend work at Pascua-Lama, its largest project under development, located high in the Andes Mountains. A Chilean court has halted some work at the project, which straddles the border of Chile and Argentina.

The Toronto-based miner also reported an 18 percent drop in first-quarter profit. The decline, attributed to a slump in gold and copper prices and volumes, was not as severe as analysts had expected.

Speaking at Barrick’s annual general meeting in Toronto, Chief Executive Jamie Sokalsky said the company could stop spending on Pascua-Lama if the timetable for resolving regulatory issues at the project remains unclear.

“We’re serious about disciplined capital allocation,” he said. “That means we need to consider all options, including the possibility of suspending the project.”

Barrick’s shares were up 3 percent at C$18.55 on the Toronto Stock Exchange at midday on Wednesday. The stock has dropped more than 48 percent this year as the company struggled with setbacks at Pascua-Lama, the fall of gold prices, and a shareholder revolt over executive compensation.

A group of Canada’s top pension funds, which are small but significant shareholders in the miner, spoke out last week against Barrick’s $11.9 million signing bonus for co-Chairman John Thornton, the man tipped as Barrick’s next chairman.

Shareholders rejected a nonbinding company resolution on executive compensation at Barrick’s annual meeting on Wednesday, underscoring broad opposition to the bonus.

While Barrick’s move to control costs was welcome, investors may want to see more evidence that the company is on the mend before jumping back into the stock.

“The market needs to better calibrate Barrick’s progress at Pascua and how management will navigate capital and operating decisions at lower than anticipated gold prices,” said Sterne Agee analyst Michael Dudas in a note to clients.

PASCUA UNCLEAR

A local court suspended work on the Chilean side of Pascua-Lama earlier this month to allow time to weigh community claims that the development is destroying glaciers and harming the water supply.

Barrick gave no update on estimated costs on Wednesday or on the development timetable for the $8.5 billion project. It said it was evaluating its options, including a plan to develop a smaller pit on the Argentine side for initial production. If that proves infeasible, it said the mine plan could change, affecting costs and the production schedule.

George Topping, a mining analyst at Stifel Nicolaus, said Barrick ought to suspend spending at Pascua-Lama sooner rather than later.

“You really have to minimize the amount of money you’re putting into Pascua-Lama, which they’re not doing,” he said. Topping added that the project also faces political risks on the Argentine side as a congressional election approaches.

Barrick has so far poured $4.8 billion into Pascua-Lama, which is expected to produce 800,000 to 850,000 ounces of gold a year in its first five years of full production.

The complex project, on Barrick’s books for more than decade, has encountered repeated delays in the face of political wrangling and the challenges of building a mine that is 3,800 meters to 5,200 meters above sea level.

Even so, Barrick is hungry to finish Pascua-Lama to replace depleted assets at a time when gold miners have little choice but to tackle deposits in remote and inhospitable areas.

COST CONTROLS

Like its rivals, Barrick is under heavy pressure to cut costs. Margins have narrowed in recent quarters as gold prices have dropped and operating and capital costs have risen.

To that end, the company reduced its full-year outlook for all-in sustaining costs to $950-$1,050 an ounce, down from a previous forecast of $1,000 to $1,100. Its forecast for total cash costs, a more traditional measure, remained at $600-$660 an ounce for 2013.

All-in sustaining costs in the first quarter came in at $919 an ounce, while total cash costs rose slightly to $561, up from $540 in the year-before period, but down from a full-year average of $584 in 2012.

Along the same lines, Barrick reduced its capital spending outlook for 2013 by about 10 percent to $5.2 billion to $5.7 billion, down from its previous forecast of $5.7 billion to $6.3 billion.

Barrick cut some $4 billion in planned capital spending last year and recast its long-term goals to focus on a higher-quality, more profitable production base of some 8 million ounces of gold a year by 2016.

The company said in February that it would not build any new mines for now, with the notable exception of Pascua-Lama.

Barrick’s net profit fell to $847 million, or 85 cents a share, in the first quarter from $1.04 billion, or $1.04, a year earlier.

On an adjusted basis, it earned $923 million, or 92 cents a share, ahead of the average analyst estimate of 88 cents a share, according to Thomson Reuters I/B/E/S.

Revenue fell 6 percent to $3.44 billion as gold production dropped about 4 percent to 1.8 million ounces in the quarter.

Spot gold slipped into a bear market earlier this month, plunging to a two-year low below $1,400 per ounce for the first time in two years. Barrick’s average realized gold price in the first quarter was $1,629 per ounce.